Aiocf

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AIOCF is down 16% because of yesterday’s earnings report. Can anyone explain the foreign exchange loss? And, what do you think of the prospects going forward? Thx.

-the link wouldn’t work, so here’s the text:

Record Revenue and Second Quarter 2014 Results
4:00p ET August 7, 2014 (Dow Jones) Print
Press Release: Avigilon Corporation Announces Record Revenue and Second Quarter 2014 Results
Avigilon Corporation Announces Record Revenue and Second Quarter 2014 Results
Canada NewsWire
VANCOUVER, Aug. 7, 2014
VANCOUVER, Aug. 7, 2014 /CNW/ - Avigilon Corporation (“Avigilon” or the “Company”) (TSX: AVO), a leading global provider of end-to-end security solutions, today announced its financial results for the three and six months ended June 30, 2014. All figures are stated in Canadian dollars unless otherwise noted.
Second Quarter 2014 Financial Highlights
– Revenue was $65.2 million, an increase of 66% over Q2 2013 revenue of
$39.2 million.

– Gross margin percentage was 55%, up from 53% a year earlier.

– Adjusted EBITDA* was $8.7 million, a 61% increase over Q2 2013 Adjusted
EBITDA of $5.4 million.

– Net income was $2.8 million, compared with net income of $3.4 million in
Q2 2013.

– Adjusted Earnings* was $5.7 million, a 49% increase over Q2 2013 Adjusted
Earnings of $3.8 million.

– Fully Diluted Adjusted Earnings Per Share* of $0.12, compared with $0.10
in Q2 2013.
“It was another quarter of profitable growth for Avigilon, highlighted by record revenue and increased EBITDA, while we made significant investments for future growth,” said Alexander Fernandes, founder, president, CEO and chairman of the Board of Avigilon. “At our current annualized run rate, we are more than halfway to our target of $500 million by the end of 2016. To achieve this target, we are continuing our successful strategy of expanding our sales team, enhancing marketing and brand awareness, and increasing research and development activities. With a view to augmenting our organic growth, we continue to evaluate acquisitions of complementary technologies in the security space.”

Financial Review
Avigilon reported Q2 2014 record revenue of $65.2 million, an increase of 66%, or $26.0 million, compared to revenue of $39.2 million in Q2 2013. Revenue growth continues to reflect increased product sales worldwide, driven by greater customer adoption in existing markets, further penetration of new target regions and sales of new products. Revenue was strong across all regions, with year-over-year sales growth ranging up to 123% in the Company’s six target geographic regions.
Gross margin was $36.0 million in Q2 2014 (55% of revenue), compared with $20.7 million (53% of revenue) in Q2 2013. The year-over-year increase in gross margin percentage mainly reflects the ongoing effects of greater purchasing power, economies of scale, and improved manufacturing efficiencies.
Sales and marketing expenses in Q2 2014 were $18.1 million, an increase of 69% compared to $10.7 million in Q2 2013. The increase reflects planned growth spending to expand the Company’s global sales and marketing team, which management believes will drive continued revenue growth. In Q2 2014, sales and marketing expenses represented 28% of revenue, compared with 27% in Q2 2013.
Research and development (R&D) expenses, net of related income tax credits and capitalized development costs, were $4.4 million in Q2 2014, compared to $2.3 million in Q2 2013. Gross R&D spend was $6.4 million in Q2 2014, a $3.6 million increase compared with $2.8 million in Q2 2013. The growth in spending is consistent with the Company’s plan to increase its R&D team to further enhance and expand its product offering. Avigilon expects to continue to increase its R&D investment, in dollars and as a percentage of revenue, to support accelerated product development.

General and administrative expenses (G&A) in Q2 2014 were $7.8 million, compared with $3.4 million in Q2 2013. The increase is primarily due to additional personnel and their related expenses, including new headcount in customer support, human resources, finance and legal. G&A expenses in Q2 2014 also include $0.7 million in business acquisition-related costs. The Company expects its administrative expenses to increase in the near term as it continues to expand infrastructure to support planned growth, but believes these expenses will increase at a slower rate than revenue.
Adjusted EBITDA increased 61% year-over-year to $8.7 million in Q2 2014, compared with $5.4 million in Q2 2013. The year-over-year improvement largely reflects the Company’s increase in revenue and improved gross margin.
Net income for Q2 2014 was $2.8 million, compared with net income of $3.4 million in Q2 2013. Net income for Q2 2014 was impacted by a foreign exchange loss of $1.9 million, compared with a $0.3 million gain in the same period last year, and $1.5 million in acquisitions related expenses.
Removing the effects of foreign exchange and acquisition related expenses, Adjusted Earnings increased 49% year-over-year to $5.7 million in Q2 2014, compared with $3.8 million in Q2 2013.
Earnings Per Share were $0.06 (basic and diluted) for Q2 2014, compared to $0.09 (basic) and $0.08 (diluted) a year earlier. Fully Diluted Adjusted Earnings Per Share were $0.12 in Q2 2014, compared with $0.10 in Q2 2013.
In 2014, Avigilon plans to continue to invest significantly to expand sales reach, accelerate innovation and build brand awareness, which management believes will contribute to further revenue growth. In the short term, however, as the necessary investments are incurred in advance of associated revenue, these initiatives are expected to put pressure on the Company’s Adjusted EBITDA and net income.
As at June 30, 2014, Avigilon had working capital of $208.8 million, including cash and cash equivalents of $156.7 million. The weighted average number of common shares outstanding for the quarter was 46.2 million basic and 47.0 million diluted. On April 8, 2014, the Company completed a bought deal financing, issuing 3,448,280 common shares at a price of $29.00 per share for gross proceeds of $100.0 million.

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Can anyone explain the foreign exchange loss?

Most of their revenue comes in as U.S. dollars. But they’re spending Canadian dollars to pay salaries, buy parts, etc. If I’ve got it right, the Canadian dollar has become less valuable compared to the U.S. dollar, so when they convert those incoming U.S. dollars to Canadian dollars, they end up with fewer than they otherwise would have.

That’s about the limit of my understanding of foreign currency exchanges. :wink:

And, what do you think of the prospects going forward?

I’m still trying to learn the terminology used in these earnings reports, but here’s how I see it.

Clearly good news:

  • Money coming in is up 66%
  • Gross margins up slightly (making more money on what they build and sell)

Things that cost us money now, but look (to me) like they’re part of continuing to grow the company:

  • Sales and marketing expenses up 69%. That’s about in line with revenue growth. They’re spending now to try to generate more revenue growth later.
  • R&D spending about doubled. They’re spending to develop more and better products (and ideally more profitable, but it doesn’t address that).

They more than doubled G&A expenses. That (expense) growth was more than double the growth in revenues. If that disparity continues, doesn’t that mean the company will become less profitable over time (made worse the faster the company grows)? If this is part of positioning the company for future growth, it seems OK. But if G&A expenses continues to grow faster than revenues, that would be a warning sign, I think.

Adjusted earnings up 49%. Not as good growth as revenues. That should be because of the increased R&D and G&A expenses, which I hope is a temporary “lump”.

As you quoted:
In the short term, however, as the necessary investments are incurred in advance of associated revenue, these initiatives are expected to put pressure on the Company’s Adjusted EBITDA and net income.

What I don’t know, is how long is OK to let them grow expenses before seeing a corresponding growth in revenues. I’m inclined to let them grow R&D expenses longer than G&A expenses, since the R&D expenses probably take longer to pay off (they have to invent, test, and build new products before they start getting any income).

This seems like a buying opportunity to me. It seems like a short-sighted reaction to a long-term opportunity. I doubled my position from about 1.5% to 3%. I continue to trim my excessive AAPL position and add to others. I think of it as “buying in thirds,” and this is my second third of AIOCF. I’ll probably wait until at least the next earnings report before considering buying a last third.

-Mark

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In preparation for their growth to $500M, they are accelerating spending on sales, R&D and new employees. So while revenue grew 66%, it did not drop to the bottom line. 
A growth company with high P/E will get slammed if there is a percention that their growth is slowing.     

Last 5 quarters

```
Rev     % change  
39.200	22.5 
51.000	30.1 
56.000	9.8 
56.000	0.0 
65.200	16.4 

EPS     % change
0.100	13.6 
0.220	120.0 
0.190	(13.6)
0.190	0.0 
0.120	(36.8)

```

LegoAbs
Staying LONG
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Most of their revenue comes in as U.S. dollars. But they’re spending Canadian dollars to pay salaries, buy parts, etc. If I’ve got it right, the Canadian dollar has become less valuable compared to the U.S. dollar, so when they convert those incoming U.S. dollars to Canadian dollars, they end up with fewer than they otherwise would have.

Mark,

I’m not sure your logic is correct. To illustrate I’ll use and extreme case. If they were equal $1 US would yield $1 Canadian, but if the Canadian currency became less valuable, say by 1/2, $1 US would yield $2 Canadian.

Well, unless I’ve totally confused myself. :wink:

Steve

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Steve, Your reasoning was right but the facts were wrong. The problem was a strong Canadian dollar, not a weak one. That devalues foreign earnings (earnings from the US).

This comes from the conference call:

Revenue in the second quarter also reflected the impact of a relatively stronger Canadian dollar compared to Q1. Our large portion of revenue is denominated in U.S. dollars, British pounds and Euros. Depending under region of our exposure to the U.S. dollar is the most significant. We estimate that every penny change in the exchange rate of Canadian dollar per U.S. dollar has an estimated $900,000 impact on our adjusted EBITDA and a $650,000 impact on net income.

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Compared to the US dollar, the value of the Canadian dollar feel during Q1 but then rose during Q2. The high and low points were when one Canadian dollar was worth $0.94 and $0.88 US, respectively. So far in Q3, the value of the Canadian dollar has been falling relative to the US dollar.

http://www.oanda.com/currency/historical-rates/

Chris

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Anyone else think the lack of volume today makes this down draft, however painful, essentially a non event?

-Frick

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Reposting most of this from a post I made on another topic here in SID:

Clearly the analysts didn’t like the report (downgrades, price target reduction, etc). A few things I noticed on the call that may have been uninspiring:

  • The FX loss. Obviously there will be some currency risk, but I much rather have the majority of this risk be in $:C$ than any other currencies. We are talking about probably two out of the three of the most stable reserve currencies in the world.

  • Massive increase in sales and marketing expense. This line caused the net income line to look ugly. CEO did mention that over time they will taper the spend as optimal market penetration is achieved. Seems normal to me.

  • The share issuance this quarter didn’t help earnings either. While Avigilon has a massive growth ramp ahead of it, I hope they do not get in the habit of constantly using equity financing in this era of historically low interest rates.

All of these things together led to the drop IMO. However, execution of their growth plan appears to be on track (or ahead).

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In early stage companies that may have lumpy revenues, especially in a recession, I am happier with dilution than debt. Because you must pay back debt in a non lumpy way. And with equity you benefit from a high P/E.
Probably for each individual company there is some ideal balance between debt and equity financing. Which is why you hire a good CFO. A good example of creative financing is Tesla. Basically they got their money almost free.

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Revenue in the second quarter also reflected the impact of a relatively stronger Canadian dollar compared to Q1. Our large portion of revenue is denominated in U.S. dollars, British pounds and Euros. Depending under region of our exposure to the U.S. dollar is the most significant. We estimate that every penny change in the exchange rate of Canadian dollar per U.S. dollar has an estimated $900,000 impact on our adjusted EBITDA and a $650,000 impact on net income.

Maybe the new CFO will start hedging currencies. One penny producing a negative $900K seems like it might be worth some money to reduce that loss.

And since the new CFO is a heavy hitter, maybe that’s why they brought him into the operation.
Mykie

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http://ir.avigilon.com/files/doc_financials/Q2-2014-AVO-FINA…

Q1 net income/Rev = 8.0/55.75 = .143 = 14.3%

Q2 net income/Rev = 2.78/65.2 = .043 = 4.3%

As Legoabs posted:

Reason for Net Income being lower this Q
Revenue in the second quarter also reflected the impact of a relatively stronger Canadian dollar compared to Q1. Our large portion of revenue is denominated in U.S. dollars, British pounds and Euros. Depending under region of our exposure to the U.S. dollar is the most significant.
We estimate that every penny change in the exchange rate of Canadian dollar per U.S. dollar has an estimated $900,000 impact on our adjusted EBITDA and a $650,000 impact on net income. Our gross margin grew from 53% in Q2 2013 to 55% in Q2 2014

Impact of Currency
Adjusted EBITDA for Q2 was $8.7 million an increase of 61% compared to $5.4 million last year. Net income for Q2, 2014, was impacted by a foreign exchange loss of $1.9 million, compared with a $300,000 gain in the same period last year and $1.5 million in acquisitions related expenses.

…

I don’t know the average ratio between the CD/USD, or what we can generally expect in the future. However, this seems to be a major stumbling block in the profitability and hence share price growth of this company.

I did buy 100 shares early Fri morning @ 19.1, which was lucky.

Regards, John

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I suspect you are right about the CFO, it is his job to do things like hedging. In the long run hedging might not produce any benefit (efficient markets) but it can do a lot for short term potholes in earnings. Also investors buying the stock probably want to bet on the company not on currency fluctuations.

If the FX hit is what depressed the stock it is a buying opportunity, because minimizing this problem for a company is a lot easier than selling more gadgets.